Andrew Buxton, chairman of Barclays, ought to have looked a troubled man as he presented his bank’s annual results last week. In the last year, Barclays had lost a chief executive, dropped £205m on rash trading in the bond markets, another £153m on bad loans to Russian customers, and had let its operating costs run out of control.

Yet Barclays somehow managed to make profits of £1.9bn.

In the same year, Lloyds TSB reported a 14 per cent increase in its pre-tax profits to £3.29bn, equivalent to an after-tax return on shareholders’ equity of 33 per cent. And other British banks made similar profits.

So where do these profits come from? And why have they not been lost to the competition from other institutions?

The first part of the answer lies in the condition of the UK economy at large. In principle, bank profits are built for the most part on the volumes of loans they make and the deposits they collect; the margins between the interest rates for these two sides of their balance sheet gives them their profits (or losses). But in a mature market such as the UK, it is hard for a very large bank to expand loan and deposit volumes much beyond the level of the economy as a whole, and even harder to widen net interest margins.

The biggest factor in bank profits has therefore been bad debts. In 1992, when banks’ accounts showed the worst of the effects of the last UK recession, the seven principal banks set aside £6.45bn of bad debt provisions between them. Last year, the total for the same group is estimated to have been around £2.6bn.

The other side of British banks’ profitability reflects an interplay between technology-based efficiency gains and customer inertia.

Banks have become more efficient over the past decade, stripping out costs as new computer systems and telecommunications networks have enabled them to set up industrial-scale processing plants for tasks that used to be handled by clerks in the back of each branch.

Branches are expensive to run, and the network has been whittled down from a peak of 21,800 branches in 1985 to around 15,000 today. Each branch, too, has fewer staff.

One of the most frequent complaints is the disappearance of the human touch in the bank branch. Yet customers have reaped most of the benefits of the banks’ efficiency gains – cash dispensed at the touch of a button by machines, instant account balances, transfers and even loans available over the telephone.

However, British banks remain years behind their French rivals in electronic banking. Nor is the UK’s money transmission system the most consumer-friendly in the world. Customers in New Zealand and Canada get deposits credited instantaneously, while in the UK they must wait days.

Competition in financial services has been steadily increasing since the 1980s. Yet the British consumer is more likely to swap a wife (or husband) than a bank. With such undemanding customers, leading banks could have years of fat profits ahead of them.

2. Which of the following examples of improved banking technology are mentioned either directly or indirectly in the text?

a) money reserved to cover bad debts
b) profit as a percentage of shareholders’ capital
c) difference between interest income and interest payments
d) method of transferring funds from one person to another

B. Word search

Replace the underlined items with words or phrases from the text that have a similar meaning.

1. Banks are affected by the state of the UK economy in general. (para 5)

2. The UK has a very established loan market. (para 5)

3. It’s difficult for a large bank to increase loan and deposit volumes. (para 5)

5. Banks have closed thousands of branches over the last ten years. (para 8)

6. Many routine banking tasks are dealt with by computer. (para 8)

7. A bank branch is expensive to operate. (para 9)

8. Technologically, British banks are behind their French competitors. (para 11)

9. Few people change banks in Britain. (para 12)

10. Most UK banks still make huge profits. (para 12)

C. Understanding expressions

Choose the best explanation for each of these words or phrases from the text.

1. troubled

a) worried b) pleased

2. rash trading

a) trading without enough care and consideration b) trading in large volumes

3. let its operating costs run out of control

a) allowed its costs, to go over the budget b) allowed its costs to be checked by external auditors

4. customer inertia

a) customers don't want to move or change anything b) customers expect a lot of improvements in service

5. stripping out costs

a) adding to costs b) removing costs

6. reaped most of the benefits

a) collected most b) lost most of the benefits

D. Word search

Find a word or phrase in the text that has a similar meaning.

1. total amounts or quantities (para 5) – v…

2. system of local offices spread around the country (para 9) – b… n…

3. highest level recorded over a period (para 9) – p…

4. designed so as to be of maximum benefit to the consumer (para 11) – c…-f…

5. when the value of a deposit is added to an account balance (para 11) – c…

6. banks with the biggest share of the market (para 12) – l… b…

E. Linking

Match the first half of each sentence with the most appropriate second half. Notice the words that are used in each sentence to mark a contrasting idea. (These words are in italics.)

1. Barclays Bank had a troubled year
2. Banks make a profit on their net interest margin
3. British banks have introduced a range of technically-advanced services
4. Canadian customers get deposits credited instantaneously

a) while UK customers have to wait a few days.
b) yet it managed to make a lot of profit.
c) but it is difficult for them to widen their margins.
d) but they are still behind the French in electronic banking.

Over to you

1. If possible, find the annual results of a bank in your country and report on its profitability.

2. How do British banks differ from banks in your country in the way they make their profits?